Sony's biggest miscalculation about Blu-ray

Bad news about Sony keep on coming.

Sony to layoff 16,000 ZD Net

And bad publicity about Blue-ray keeps on on coming as well.

How can we expect Blue-ray to succeed - CNET

Inthe past, Sony was successful in transitioning users from VHS to DVD, by combining DVD player with PS2.  It was a great "killing two birds with one stone" strategy, as it also helped their game business as well.  But looks like that same strategy did not work for Blu-ray+PS3 combo after all.  Why was that?

The transition from analog to digital brings along a drastic cost reduction (=higher margin) for all the providing parties involved, and a drastic utility increase (=better quality) for users.  DVD is much cheaper to produce than VHS tapes, cheaper to transport, takes up much less space in the store, and harder to break.  It means both publishers and sales channel enjoy less direct and indirect cost and much higher margin.  At the same time, consumers enjoy better video/sound quality, and don't even mind to pay MORE money, even though the actual COST is cheaper.  That makes the margin even more attractive to the providing parties.  I am not sure if the rights holders (movie studios) enjoyed higher royalty or not, but anyway, pretty much everyone was happy.

This phenomenon is called "dominant choice" in microeconomic terms.  It was also applicable for "record to CD",  and "analog cellphone to digital" transition.  Those are the cases of gold mine to be exploited.

Now if you look at the transition from DVD to Blu-ray, you can see that the formula does not work.  Blue-ray probably is more costly to produce.  The transport and inventory cost would be the same for the sales channel.  And the benefit for the consumer is rather small, if not zero, hearing from all the opinions on the Net.  So basically, there is no added value to be distributed among all the parties involved.

As long as Sony was aware of it and was realistic that the transition would take much longer because of Blue-ray's "non-dominant" status, the current crisis would not have been this severe.  Sony's biggest miscalculation here, I believe, is that they were trapped in the past success and had an illusion that they could repeat it again.